Investment Multiplier

1. Investment Multiplier
(Keynesian Investment Multiplier)
 In simple term the multiplier is something that multiplies or
increases.
 In economics particularly in macroeconomics the multiplier is the
change in output that results from one unit change in autonomous
expenditure.
 Investment Multiplier asserts that an increase in private consumption
expenditure, investment expenditure, or net government spending
raises the total Gross Domestic Product (GDP) by more than the
amount of the increase.

2. • The belief of Keynesian multiplier is that if investment increases there will
be an increases in output due to the multiplier relationship between
equilibrium output and autonomous expenditure.
• According to Kurihara – “The multiplier is the ratio of change in income to
the change in investment.”
k =
∆𝑌
∆𝐼
where k = investment multiplier ; ΔY= change in income/output ; ΔI =
change in investment

3. Assumptions
• Constant Price Level – no change in the price of the commodities and
price of raw materials.
• Less than full employment
• No shortage of factor resources
• No time lag – no time lag between receipts of income and its
spending
• Autonomous Investment – effect of interest rate is neutral in the
economy

4. Derivation of Simple Keynesian Investment
Multiplier
• We know that equilibrium occurs when Y = AD
Y = C + I, ………….(i)
the relationships holds true when there is change in variables
ΔY = ΔC + ΔI……………(ii)
dividing both side of equation (ii) by ΔY,
∆𝑌
∆𝑌
=
∆𝐶
∆𝑌
+
∆𝐼
∆𝑌
……….(iii)
1=
∆𝐶
∆𝑌
+
∆𝐼
∆𝑌
by the definition we know that
∆𝐶
∆𝑌
= MPC

5. continued
1= MPC +
∆𝐼
∆𝑌
1- MPC =
∆𝐼
∆𝑌
∆𝑌
∆𝐼
=
1
1−𝑀𝑃𝐶
……………..(iv)
From equation (iv) we can say that there is direct and positive relation between size of multiplier
and MPC. It shows that higher the MPC higher the k and vice versa.
Furthermore we can write the equation (iv) as given below,
∆𝑌
∆𝐼
=
1
𝑀𝑃𝑆
……………..(v)
From equation (V) we can say that there is inverse relationship between size of multiplier and MPS.